Normally I?m a pretty reticent person, but I have to say that I?m quite unabashedly pleased to be here tonight. I?m very grateful to the IAFE, to SunGard, and to the Selection Committee for having cho- sen me to receive the Financial Engineer of the Year Award. It?s one of the best things that has ever happened to me, for a number of reasons I?d like to spell out, now that I have an uninterrupted opportunity.
1. First, I?m happy because I really love financial economics. What I like about the field is that it?s so amenable to a variety of approaches and skills. Financial theory in its practice seems to me to be ruled by a sort of troika of skills, namely mathematics, software, and financial intuition, all of them requiring imagination. Software itself is just another kind of conceptual art, a sort of archi- tecture with words. My one regret is that I didn?t know what a rich field it was during those early days when I was learning to be a practising physicist, and had never yet opened the Business Sec- tion of the Times. In the early 70s I was a physics postdoc at the University of Pennsylvania, and I didn?t know that at that time, across the campus, two thirds of that other ruling troika, Cox, Ross & Rubinstein, were doing their early work on options.
2. Second, I’m pleased because for me, finance and Wall Street have been a second act, or perhaps even a third in a troika of disciplines. I first spent a biblical seven years as a physicist in academia, then a further five as a quaintly named Member of Technical Staff at Bell Labs, and finally, the last fifteen on Wall Street. The first two careers were an excellent preparation, but the third was by far the most satisfying.
I started out in pure physics. When I left that field for applied work at Bell Labs, I was sad for several years. I felt that I was abandoning my aspirations to work on what I thought were the deep and transcendental things in life.
Of course, that wasn?t true, though it certainly felt that way for a while. But I eventually learned that almost anything that absorbs you can expand in scope. A narrow focus, if you take it passion- ately enough, and if you?re lucky, can propel you through a sort of cosmological wormhole into much wider spaces.
My personal espresso jolt came when I moved to Goldman. There, I quickly became exposed to options theory, and grew quite excited. I used to sit on the No 3 Express on the West Side, going home from 85 Broad to 86th and Broadway, reading Jarrow & Rudd and Cox & Rubinstein ? about the only books you could get then ? scribbling proofs on my lap on shaky trains. One day, soon after I started, one of my ex-Bell-Labs vanpool friends got on and saw me immersed in sym- bols. He laughed incredulously at me for sitting there and doing mathematics on the subway – that was what you were meant to leave behind when you joined the business world!
But I remember thinking the opposite: that it was a relief to be in a place where people actually wanted you to spend your time on what naturally absorbed you. I told my vanpool friend that I could easily imagine doing this sort of work for another 10 or 15 years, and I turned out to be right.
What jumps into my head when I think of my luck here is a one-paragraph Kafka story, entitled A Little Fable, that my son Joshua showed me recently. It goes like this:
?Alas,? said the mouse, ?the world is growing smaller every day. At the beginning it was so big that I was afraid. I kept running and running, and I was glad when at last I saw walls far away to the right and left, but these long walls have narrowed so quickly that I am in the last chamber already and there in the corner stands the trap that I must run into.?
?You only need to change your direction,? said the cat, and ate it up.
When I left academia, my world did indeed grow temporarily smaller. For several years I could see the walls and sense the cat, but somehow, I was luckily able to change direction before the cat?s jaws closed. My wife Eva helped me, and I?m always grateful for it.
3. The third way in which I?m glad to accept this award is as a practitioner. Practitioners really do have more fun, and they have to worry less about referees? reports.
The best place to learn the necessary skills, and the best place not to learn too many unnecessary ones, is in a stint on the Street. Here we have to choose a third way, somewhere between the for- mal axioms of economics textbooks and the quicksilver thinking of smart traders. I?m glad to be accepting this award as one of the practitioners who makes daily use of what we all do.
I?ve spent most of my working life doing research and I want to thank a few people who made me feel good about this.
First, the personal part. I?m grateful to my wife Eva. Through thick and thin, she?s always encouraged me when I needed encouragement and listened when I needed a sympathetic ear. She, and our kids, Josh and Sonya, taught me much about the right attitude to life and work.
Now for the professional side.
- Before I came to Goldman, Sachs, and at various times afterwards, I was influenced by Stanley Diller. He was the first person I met who took both options valuation and portfolio software seri- ously, and understood their inevitable confluence. Stan also emphasized the value of educating clients, with the faith that education helps the educator too.
After coming to Goldman, I was influenced by a collection of colleagues and academics, among them:
- Ravi Dattatreya, my first all-round guide to finance and financial software;
- David Garbasz, a fixed-income options trader and a modeling and software proponent who built the first modern commercial risk management system that I know of;
- Fischer Black, for many reasons, but especially for his lack of respect for authority and received ideas, for his stubborn belief in the power of clear thinking and writing, and for his unsentimental lucidity about the real world;
- John Cox, Steve Ross and Mark Rubinstein for their justly famous binomial model. It phenome- nal efficacy served as both a crutch and an inspiration in thinking about options in the early days. Just as importantly, it provided practitioners with a simple and yet honest way of communicating with traders and clients.
- Dan O?Rourke, an equity derivatives trader at Goldman, who was always willing to try to translate trader patois into quant Latin and vice versa;
- Also, over almost ten years, I?ve also benefited from working with my colleagues in Trading and in the Quantitative Strategies and Equity Derivatives Research groups at Goldman.
- I?m especially grateful to Iraj Kani, Mike Kamal, Joe Zou and Kresimir Demeterfi, colleagues and collaborators in Quantitative Strategies. They regularly revived my spirits by their enthusiasm, insight and perseverance. Several times, they dragged me back to work with them just as I was about to be sucked over the event horizon and into the bureaucratic singularity.
- I also want to thank Tanya Beder and the IAFE and its founders, among them Jack Marshall & the late Bob Schwartz and Vipul Bansal, whose foresight and perseverance made this organiza- tion a home for many of us, and gave us an identity we needed.
- Finally, I?m grateful to Goldman, Sachs. I especially appreciate the way the company doesn?t have a single mold, but allows people to feel that they can contribute in many different ways by doing what they excel at. Ultimately, it?s doing what you love that makes work a pleasure.
The Past and the Future
When I think about the early days of financial engineering on the Street, those schoolboy lines from Wordsworth jump into my head:
?Bliss was it in that dawn to be alive, But to be young was very heaven!?
Although I missed the beginning of the financial economics revolution, even in my time the work was varied and exciting. There were few standard solutions, and anything simple and mildly clever you could do had a noticeable impact. You didn?t have to be too refined. The field we worked in had no name and no approved curriculum. There were no weekly Risk Magazine conferences and no martingales. It was simple fun. Now it?s much more specialized, but that?s the price of success.
Nevertheless, I like to think that financial modeling can still feel like it did then. A while back I read a biography of Goethe, one of the last people to make contributions to both art and science. Scientists regard Goethe as a poet who strayed beyond his proper place. His critics said he mistakenly thought of nature as a work of art, and that he was trying to be qualitative where he should be quantitative. But, according to the book I read, Goethe was not so naive as to think that nature is a work of art. Rather, he believed that our knowledge and description of nature is a work of art.
That?s how I like to picture what we do ? making a beautiful and truthful description of what we see. We?re involved in intuiting, inventing or concocting approximate laws and patterns. We can synthe- size both art and science in creating understanding. We can use our intuition, our scientific knowl- edge, and our pedagogical skills to paint a picture of how to think qualitatively and then, within limits, quantitatively, about the world of human affairs, and in so doing, have an impact on how other peo- ple think. There?s not much more one could ask for without being wishful.
I?m very happy to be here tonight with all of you. Thank you.